Oil: Futures Spread and Prices Are Diverging

On February 25, US crude oil April 2019 futures closed ~$1.8 below the April 2020 futures. On February 15, the futures spread was at a discount of ~$2.1. On February 15–25, US crude oil April futures fell 0.9%.

The market sentiment towards the oil demand and supply situation is reflected in the futures spread. A contraction in the discount is usually accompanied by a rise in oil prices. In the last five trading sessions, the spread’s discount contracted, while US crude oil prices fell by nearly one percentage point. Last week, the optimism surrounding the US-China trade talks contracted the spread’s discount. However, President Trump’s tweet against oil’s rise on February 25 might have dragged oil prices.

On February 15–25, oil-weighted stocks Carrizo Oil & Gas (CRZO), Callon Petroleum (CPE), and Concho Resources (CXO) fell 8.4%, 8.5%, and 11.5%, respectively, and underperformed their peers.

As of February 25, the US crude oil futures contracts for April and November were priced in ascending order. The price pattern is a negative sign for ETFs that follow US crude oil futures like the ProShares Ultra Bloomberg Crude Oil ETF (UCO) and the United States 12 Month Oil ETF.